Economics (5) Scaling

The earlier discussion of investment gave investment the definition of “doing work, expending time and effort, before it (the product) is needed”. I think of this as “baseline investment”, providing the minimum profit at the minimum risk.

Scaling involves investing time and other resources beyond the minimum.  A scaled operation is only profittable in one of two ways.  The simplest way is to produce a product or products that will be used or consumed before they go bad, a period called the “shelf life” of the product.  The other way is to count on trading away the product(s) within the(ir) respective shelf life(s).  Both ways become profittable when scaling causes the cost per unit of product to go down, which it will if there are overhead costs which increase less than proportionately to the increased quantity of product(s).  Those overhead costs are sometimes referred to as “non-recurring engineering costs”, or even as “setup costs”.

A very simple example is preparing a field to grow a crop.  The total investment is the sum of two parts: the setup of the plow and the trip to the field plus the work per area affected (width of plow effect by length of plow track).  Increasing the size of the field increases the cost of plowing in proportion to the additional area, but the overhead of preparing to plow increases trivially up to the point where the field is too big to plow in one session.  Thus, a farmer might reasonably increase the size of his field from the minimum needed to satisfy the household requirements, up to the maximum area that can be done without having to add additional days.

This boundary in the problem space is affected by the configuration of the plow, by the number of animals to pull the plow, by the number of workers on the farm, and by other factors.  Increasing the field size should result in an increase in the crop yield and the surplus can be traded.  Trading a crop surplus for tools to scale operations counts as investing.  Farm productivity (product produced per resources consumed) has increased for most of the last several millennia, with obvious acceleration for much of the past several centuries, as profits have been “plowed back into the operations”, buying or building improved tools and methods.

There is amusement to be gotten by recognizing that this concept of scaling can be applied to itself, scaling of scaling.  Once you realize that some productive activity already being done can be scaled to some profit, it is a short leap to seeing how much it can be scaled, that is, scaling up the scaling operation.  In the simple example above, this might look like analyzing how big a field can be made productive, how much can tools reduce the unit costs, how much surplus product can be traded, how much of the trading process can be replicated or expanded (scaling that process), etc.

Establishing patterns of trading surpluses together with scaling of scaling can lead to the discovery of specialization.  This is the abandonment of less productive activities to others and replacing those products (that you no longer make) through trade.  The evolution of specialization is not only possible, but progresses with relative rapidity because almost every incremental refinement of the process is more efficient, more productive than the previously accepted practices.

Author: protin

A futurologist (madman) using systems analysis techniques to try to be prepared.

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